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Computation of loss due to Foreign Currency Exposure.
Zapata Auto Parts, the Mexican affiliate of American Diversified, Inc., had the following balance sheet on January 1
Assets (Mex$ millions)
Liabilities (Mex$ millions)
Cash, marketable securities
Mex$1,000
Accounts receivable
50,000
Current liabilities
Mex$47,000
Inventory
32,000
Long-term debt
12,000
Fixed assets
111,000
Equity
135,000
Mex$194,000
The exchange rate on January 1 was Mex$8,000 = $1.
a. What is Zapata's FASB 52 peso translation exposure on January 1?
b. Suppose the exchange rate on December 31 is Mex$12,000. What will be Zapata's translation loss for the year?
c. Zapata can borrow an additional Mex$15,000 (in millions). What will this due to its translation exposure if it uses the funds to pay a dividend to its parent? If it uses the funds to increase its cash position?
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